Stepping onto the ladder
It’s no secret that it’s becoming increasingly difficult for young Australians to buy their first home. So, it should come as no surprise that many parents are looking for ways to help their adult children take that first step onto the property ladder.
The current slowdown across the housing market, combined with continuing low interest rates, may provide an opportunity for young buyers to enter the market.
If you are considering helping your children buy property there are several factors – both financial and emotional – that you should consider.
How will you help?
There are a few different options available to you if you wish to help your child financially with their purchase.
You may decide to provide a monetary gift or help them with a loan.
Each option comes with considerations you should factor in. A conversation with a financial adviser can help you decide on the best option for your individual circumstances.
A lump sum gift
Providing a monetary gift can help your child with the deposit on their property.
This can be a tremendous benefit to young buyers as it allows them to enter the market sooner rather than later.
Young buyers are often able to cope financially with their ongoing mortgage repayments, but the large lump sum deposit that is required upfront can be a huge barrier to entering the market.
Factors to consider
While a cash gift is often tax free, there are several factors to consider before you offer up a lump sum.
To secure a loan, first time home owners may be required to keep the sum in their bank account for a period of time to prove they can service their repayments. The time period can be up to six months but varies according to the loan provider.
Timing may also be a factor for you. Depending on the size of the gift, if you are eligible to receive the age pension within the next five years, a monetary gift may impact your pension entitlements.
It is also important to be aware that if you gift money to a child who is married or in a de facto relationship and the couple separate, the gift will usually be considered part of their family assets and divided up in the settlement.
Helping with a loan
If you are considering helping with a loan there are several ways you can choose to structure this agreement.
- Providing a direct loan to your child
- Purchasing the property jointly
- Acting as a guarantor to the loan
A direct loan
If you are lending money directly to your child, it’s a good idea to treat the loan as a business arrangement.
Disagreements over money can wage a huge toll on family relationships. Anticipating problems before they arise may be the best way to avoid them altogether.
Consider drawing up a formal agreement, including a set repayment schedule. You may even want to consult a lawyer who should be able to point out potential pitfalls in your agreement.
A joint purchase can be a good option as it means you are sharing the liability.
Make sure you only commit to a level of debt that you are comfortable with.
Acting as guarantor
Acting as guarantor for your child’s loan means you will need to use your own assets, such as the family home or term deposits, as security.
Be sure to set your limit; an unlimited guarantee means unlimited risk. Many banks offer loans with a family guarantee that allow you to set a limit for your liability.
It is important that you fix the amount you guarantee to an amount you know you will be able to afford to repay.
Help in kind
There are other practical ways to help your children that don’t involve becoming the family bank.
You could let them live with you, so they can save for a deposit rather than paying rent.
Buying your first property can be daunting and confusing. Drawing on your own experience to help your child navigate the world of real estate, mortgages and hidden costs is an invaluable gift in itself.
Every parent wants to help their children but it’s important to make sure you are not putting yourself under undue financial pressure. Money problems can quickly breed resentment and lead to a breakdown in family relationships.
However you choose to help your child, for the sake of your family and your finances, only commit to what you are comfortable with.
If you are considering options on how to help your child buy property, the advisers at First Financial can show you what impact your decision may have on your own financial future, and help you develop a plan that best suits your individual circumstances. Contact us today. Read more Financial Planning articles.